Administrative monopoly and China's new Anti-Monopoly Law: lessons from Europe's state aid doctrine.

Author:Schneider, Jacob S.


On August 1, 2008, China's Anti-Monopoly Law (AML), its first comprehensive anti-monopoly legislation, came into effect. (1) Observers guardedly hope the AML will serve as a crucial legal foundation for the sustained development of China's thriving market economy. (2) Much as American antitrust law is "the Magna Carta of [United States] free enterprise" (3) and European Community competition law helped provide the economic basis for the ongoing political unification of Europe, (4) the AML may similarly cement the role of the free market in post-reform China. (5)

One of the most exciting parts of the AML is Chapter V, "Abuse of Administrative Power to Eliminate or Restrict Competition." (6) This chapter is aimed at preventing government agencies and organs from using their power to interfere in competition, particularly regarding interprovincial and interregional business. (7) Economists typically call such government interference an "administrative monopoly." (8) Given China's history of state presence in nearly every facet of the economy, (9) Chapter V of the AML has the potential to bring monumental changes to the nature of the Chinese economy and even political system. Yet as with any fundamental economic transformation, the way ahead is unclear. China's judicial system is improving, but is still inexperienced in competition law, (10) and drawing a definitive line between proper state economic intervention and illegal state interference is inherently difficult.

This Note will look to the European Community doctrine of State Aid (11) to suggest a path for implementation of the AML's administrative monopoly provisions. Some of the suggestions are very unlikely to be implemented given China's current economic and political situation, (12) but are offered for consideration of China's long-term legal and economic development. Part I will discuss economic and political consequences of administrative monopolies, followed by a focus on administrative monopolies in China specifically. Part II then addresses the history and political context of competition law in China, followed by a history and outline of China's new AML. Part Ill is a history and outline of European competition law and its enforcement, with a focus on Europe's State Aid doctrine. (13) Part IV compares the situations of Europe and China and ultimately suggests areas where European competition law could instruct implementation of the AML and its enforcement mechanisms.


    1. The Problem of Administrative Monopolies Generally

      Possibly without exception, every country with a functioning government has administrative monopolies, (14) ranging from local trash pickup to a national electric grid. The problem of administrative monopolies ("abuse of administrative power," to use the language of the AML (15) arises when government uses its power to control markets through legislation, regulations, or use of administrative organs to seek above-market rents. (16) Economic theory generally holds that administrative monopolies, like other monopolies, hamper overall social welfare with increased prices, reduced output, and reduced competition. (17) In addition, administrative monopolies are often geographically protectionist, disrupting trade and potentially weakening the political unity of the broader unit (the nation, in the case of China or the United States, or the European Union in Europe's case). (18)

    2. The Origin and Problem of Administrative Monopolies in China

      Administrative monopolies are associated with a number of problems, explained below. Aside from the economic deficiencies associated with monopolies generally, the localized and political nature of such entities tends to undermine the regulatory process, and also tends to create problematic regulations, such as trade restrictions, because single entities are vested with the conflicting goals of market participation and regulatory power. (19) This mish-mash of market participation and regulatory responsibility is a result of China's rapid transition from a command economy to a market-led economy in pursuit of the overriding policy goal of economic growth. (20)

      China's post-1978 economic reforms resulted in a great deal of decentralization. (21) In the pre-1978 Maoist era, the economy was nearly entirely state-planned. (22) By its nature, a centrally planned economy is a market heavy with state-owned enterprises (SoEs), many of which are administrative monopolies. (23) Thus, China has had administrative monopolies not only in the traditional sectors such as utilities, transportation, and telecommunications, (24) but also in sectors where the role of government is traditionally far more circumscribed in free-market economies, including entertainment and tourism. (25) After coming to power in 1978, Deng Xiaoping (26) radically altered China's economic system to focus on growth through marketization and free enterprise instead of state control. (27) Concurrently with these free market reforms, Beijing devolved control of much of the economy to local and provincial governments. (28) Local and provincial governments' incomes shifted from disbursements from the central government in Beijing to local sources, including local SOEs. (29)

      The economic reforms have been wildly successful in bringing hundreds of millions out of poverty, (30) but local control and financing has created opportunities for the creation and abuse of administrative monopolies and incentives for local protectionism. (31) one example of local protectionism includes charging higher fees in Shanghai for cars produced outside the city. (32) Additionally, local control of income sources weakens Beijing's regulatory measures, as local governments often fund their own judges and other regulatory bodies; (33) and where regulatory power still rests with Beijing, local officials would often rather take the mild risk of punishment from Beijing than forego income derived from local SOEs. (34) other forms of Chinese administrative monopolies include industrial trade barriers and administrative companies. (35) Examples of industrial trade barriers include government departments responsible for a certain industry or trade associations using their regulatory power to block new entrants. (36) This is essentially a form of regulatory capture that creates an administrative monopoly. (37) China also has a number of "administrative companies," which are companies that have both the power to regulate an industry and engage in that industry itself. (38) Existence of such administrative companies is a result of government reform failing to keep pace with China's broader reforms. (39) Likely consequences of such a combination of market participation and regulatory power are some of the problems associated with regulatory capture (40)--an administrative company will have the conflicting goals of earning profits in the market and regulating the market for the benefit of consumers, the economy, and the state as a whole. The AML's administrative monopoly provisions are an attempt to reassert central control, (41) tear down barriers to economic growth, protect consumers, and regulate competition. (42) They are also a necessary part of the AML's general goal of establishing a comprehensive competition law to replace China's former piecemeal competition regime.


    1. History of China's Competition Legislation and the AML

      Before beginning the outline of the AML, it is worth noting one commentator's perspective on the primary purpose of China's AML in contrast to competition laws in other countries:

      [E]xcessive [government] intervention still widely exists all over the country and is by far the top threat to competition. The primary mission of the AML is to correct governmental distortion rather than limit private restrictive practices. That also explains why it contains a special chapter addressing "administrative monopoly" or State restraint on trade. Therefore, one has to bear in mind that the AML is not merely designed to restore competition but also to take affirmative actions to "create" competition. This unique feature distinguishes it from competition laws in most other jurisdictions. (43) The AML promises to significantly improve a competition law regime hindered by a history of piecemeal and often unenforced legislation, as well as overlapping and unclear enforcement agencies. (44) The 1993 Anti-Unfair Competition Law (45) was the most important early effort at a competition law, including prohibitions on tying, (46) predatory pricing, (47) and bid-rigging, (48) as well as a small provision prohibiting government abuse of administrative power. (49) other competition provisions can be found in laws such as the Commercial Banking Law, (50) the Price Law, (51) the Procurement and Bidding Law, (52) and the Patent Law, (53) and a variety of administrative rules issued by administrative agencies, often as interpretations of previous law. (54)

      In light of the fragmented and vague laws and regulations listed above, the Chinese government has had its sights on a comprehensive competition law since as early as 19 8 7. (55) In 1994, the State Economic and Trade Commission (SETC) (56) and State Administration of Industry and Commerce (SAIC) (57) began work on the AML. (58) After the project sat on the backburner for years, the National People's Congress Standing Committee announced its revitalization "[a]fter China's accession to the World Trade Organization (WTO) in 2002," and a number of drafts were circulated between 2002 and 2004. (59) Despite the concerns of foreign onlookers regarding the AML's hurdles for mergers involving foreign businesses acquiring Chinese companies, the issue of administrative monopolies was the most contested within China. (60) As a result of the variety of interests and viewpoints involved, the final version was repeatedly delayed before passage in...

To continue reading